Hamish McRae: Recovery was never going to be easy

There has been some growth, and that is a relief, but now the slog has begun
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The Independent Online

Stand by for the double dip – and a double dip led by America. The world economy has staggered out of recession, or at least most of the developed world has, for most of the emerging economies never went into recession at all. But during the past couple of weeks the "Phew!" factor has faded. Yes, there has been some growth and that is a relief but now, post the initial bounce, the slog has begun. That is the time when bad news accumulates, when it becomes clear that we are not through this yet by any means.

That has become particularly evident in the United States. The various fiscal measures to boost the economy are coming to an end. The "cash for clunkers" programme to boost car sales has already ended, and though US car-markers will have gained some modest advantage from Toyota's woes, many of the Toyota models are made in the US, so communities there have been damaged by the recalls. The housing market, which has been steady for several months, faces a big challenge when the support from a mortgage tax credit comes to an end. Deals have to be signed by the end of April and sales concluded by the end of June to qualify for the homebuyer tax credit, a scheme which in effect gives new buyers $8,000 and people trading up, if they have lived in their present home more than five years, $6,500.

The problem will be a familiar one to Britons. Though prices have stabilised and in some areas actually risen a little, there is a huge overhang of people who would like to sell but have been holding off until the market was stronger and there will also be a stream of foreclosed properties hitting the market in the coming months.

As the realisation has mounted that the US economy is still in a lot of trouble, a sharp weakening of consumer confidence has occurred. Just yesterday the Conference Board, a firm of economic forecasters and analysts, reported that consumer confidence had plunged to a 10-month low, with homeowners in particular being worried about their future earnings and employment prospects. This is serious: consumption accounts for nearly 70 per cent of the US economy so any weakness there pulls the entire show down.

There is a further twist here. There are signs around the world that the period of ultra-low interest rates and other methods of monetary expansion are drawing to an end. China is tightening policy and India is expected to do so. Some smaller developed nations have increased interest rates. We here have halted, at least for the time being, our "quantitative expansion" programme. The European Central Bank has halted its unlimited lending programme and may stop other special measures next month. But what the rest of us do is overshadowed by what the US Federal Reserve does; we all matter a bit but the Fed matters hugely. Everyone is waiting to see when it will start to push rates back to normality.

And so the Fed's move last week to increase one of its interest rates from 0.5 per cent to 0.75 per cent takes on enormous significance, the first tiny sign that the interest rate tide has started to turn. The experts may say that if the US economy is weak through the summer and autumn monetary policy will remain loose and they are right. But ordinary people can see that once things turn they will continue to do so. The only question is the speed at which the tide flows.

So in the coming months there will be a string of troubling news that the recovery is faltering. There were some bad business confidence numbers yesterday from Germany, with the Ifo business climate index falling for the first time for a year. That suggests German growth is faltering and Germany of course remains Europe's largest economy. Several countries, including ourselves, will probably get a negative quarter of growth for the first three months of this year – though expect the numbers for the final quarter of last year to be revised upwards a little.

So what should be make of all this? I think the first thing to be aware of is that this is normal. Recessions have causes and until those causes have been tackled it is hard for economies to recover. In this instance the principal cause has been a huge credit bubble that inflated property prices and has left many people which debts they are struggling to get under control. This is not the place to play the blame game – there has been plenty of that already. So let's just observe that until people and companies are comfortable with their debts and banks know the extent of the write-offs they will have to sustain, it is hard to have much of a recovery. This all takes time. But then it always takes time to recover from recession, whatever the causes thereof.

That leads to the second point. If this downturn follows the pattern of previous ones, there will be many months to go before global growth is properly rekindled. If you plot this US downturn against that of earlier ones you would not expect the graph to rise steadily until the end of this year. It would be nice to pretend otherwise but it ain't true. I know it seems ridiculous that if governments can rescue banks and central banks can pump in so much money that they turn around house prices, that they cannot also ensure that the recovery is solid and sustained. But they can't.

We are this spring seeing the limits of government power, and we are seeing it in the US, here in Britain, in Europe, everywhere. You can pile in additional demand for an economy for a while. That has happened right around the world and it has been successful. But you cannot follow those policies indefinitely, and if you try you reach a tipping point where your actions start to have perverse effects. I suppose that is where Greece is now.

That leads to a third point. There will be a double dip in the world economy and there is a not a huge amount that can be done to prevent that. But because policies to date have been successful in preventing a true catastrophe, they have also given a period of relative stability during which the long, tough task of correcting past errors can carry on. The wounds can continue to heal. There will be some growth this year, in the US, here and elsewhere, notwithstanding the odd quarter when things relapse. And then there will be more growth next.

h.mcrae@independent.co.uk

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